Property investment guidance
How to calculate rental yield: gross yield, net yield and cash flow
A high rental yield can catch your attention. Before you buy, establish what the calculation includes and how much cash the property is likely to leave after its costs.
Start with the rent and the purchase price
Gross rental yield expresses annual rent as a percentage of a property’s purchase price or value. It is a useful first comparison, provided you use the same basis for each property.
Gross rental yield = annual rent ÷ purchase price × 100.
A property bought for £75,000 and let at £750 a month produces £9,000 a year if all 12 months’ rent is received. Its gross yield on purchase price is 12%. That is the simple example used in my original article.
It does not establish that you earn 12% profit. Repairs, management, insurance, borrowing and other costs still have to be paid. A property mentor should help you examine those assumptions before you commit.
Be clear about the amount invested
The purchase price is only part of the cost of acquiring a rental property. Add the transaction taxes that apply to you, legal fees, auction charges, surveys and the work needed to make the property ready to let.
If those items take the £75,000 purchase to a total investment of £83,000, the same £9,000 rent represents 10.84% of that total. Both percentages are mathematically correct. They answer different questions.
For an existing property, you may also calculate yield against its current value when reviewing whether to retain it. Label the denominator clearly. Comparing a yield on an old purchase price with another property’s yield on current value can be misleading.
Our guide to refurbishment costs helps you test the works allowance, while the investment checklist brings the acquisition checks together.
Calculate a net yield on a stated basis
The phrase “net yield” is used in different ways. Some calculations include borrowing and tax; others measure the property’s operating income before either. Ask which costs have been deducted.
For the example below, net operating yield means annual rent less property running costs, divided by the total acquisition and initial works cost. Finance and tax are shown separately. This makes the calculation easier to compare across investors with different borrowing arrangements.
| Item | Amount |
|---|---|
| Purchase price | £75,000 |
| Acquisition costs and initial works | £8,000 |
| Total investment before borrowing | £83,000 |
| Annual rent, with 12 months received | £9,000 |
| Annual operating cost allowance | £1,800 |
| Net operating income before finance and tax | £7,200 |
| Net operating yield on total cost | 8.67% |
Build the operating allowance from the actual property. Include management, maintenance, insurance, compliance and any service charges, ground rent or owner-paid utilities that apply. Allow for periods without rent and avoid counting the same expense twice. Our letting agent fees page sets out the charges for our services.
Work out the cash left after borrowing
If annual mortgage interest in this illustration is £3,600, the £7,200 operating income leaves £3,600 before tax, or £300 a month on average. That borrowing allowance is an assumption, not a current mortgage quote.
Capital repayments on a repayment mortgage also reduce the cash available in your bank account, although they reduce the outstanding loan. Keep them distinct from interest and from the calculation of taxable profit. Ask your accountant to calculate the tax position for your ownership structure.
MoneyHelper’s buy to let mortgage guide explains the funding considerations. Discuss the particular property and your circumstances with a mortgage adviser.
Test a year that does not go to plan
Now allow for 1 month without rent and an unexpected £1,200 repair, both additional to the allowances above. Those changes remove £1,950 from the annual cash surplus. The £3,600 becomes £1,650 before tax, equivalent to £137.50 a month.
Do the maths before you buy. A property may still fit your objectives, but a headline yield is no substitute for an accessible reserve and a realistic maintenance plan. Inspect the building, check local tenant demand and use evidence for the achievable rent.
Use yield to support the decision
There is no single percentage that makes every property a good investment. Condition, location, tenancy, finance and the price all matter. A yield based on an unachieved market rent needs to be labelled as a projection.
Our conditional auction case study shows why a striking yield needs its cost assumptions explained. The Sefton Park receiver purchase explores a different part of the appraisal: understanding the opportunity and the seller.
Dominic Farrell’s property mentorship helps investors develop the judgement behind these calculations. Bring the purchase details, rent evidence and costs to the discussion. The useful question is whether the whole investment works for you.
About Dominic Farrell
Dominic is a property investor, developer and mentor, a director of Tuna Fish Property, author of Property Auctions: Repossessions, Bankruptcies and Bargain Properties and host of The Property Auctions Podcast. Explore his experience and approach to property mentorship.
Build the judgement behind your next purchase
Discuss your objectives, experience and investment plans with Dominic Farrell. Explore the Property Auction Professional Mentorship, delivered through Distressed Assets.
Developed from the original Tuna Fish article. Historical figures describe the recorded case. Illustrative calculations are examples, not forecasts. Obtain professional advice appropriate to your transaction.
